The Dirty Dozen Credit Card Traps

Does the credit card industry profit mostly from interest rates? Yes. But wait, there's more... Credit cards are the most lucrative segment of banking, and not just because of the interest charges. It's a case of the hook - the low interest rates, the line - the high interest rates, and the sinker - the fees. Everyone in the industry wants to sell you a credit card. Don't be fooled by the offers. Below we present a dirty dozen traps and tricks used by credit card peddlers to fill their pockets and empty yours.

1. The 0% APR. - Not forever, and maybe not ever

Almost everyone gets credit card offers in the mail. "0% APR" it says in big letters on the envelope and at the top of the offer. It's a loss leader, but the only one who loses is you.

Most of the 0% Annual Percentage Rate (APR) offers are for balance transfers only, meaning that you can transfer the balance you owe on another credit card to the new card. Any new purchases or cash advances will have a much higher interest charge. Even if the 0% introductory offer includes purchases, the special rate expires quickly, usually after a few months.

But the real catch is that you might receive the discounted APR for an even shorter time than advertised, or not at all. Below is a screenshot of the terms for a surveyed bank MasterCard. The introductory APR is 0% for purchases. The time period is 5 months.

First of all, you will only get the 0% if the card issuer decides to give it to you, which you won't know until after you have applied. If your credit rating is favorable to them, you might (or might not) get the 0% APR, but even if you do, watch out for the sand traps.

Below is the small print for the bank card surveyed. Note that if your monthly payment is late one time (once is enough), the 0% APR jumps to 17.99% (or 12.99%, whichever they feel like charging you - do you feel lucky?). If you have two late payments, the APR hits the ceiling and becomes the "penalty" or "default" APR up to 29.99%.

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2. Default APR

Credit card disclosure statements have something that is innocuously labeled the "default APR." Once upon a time the default APR was for subprime, bad credit boys and girls. But not anymore. Credit card providers are anxious to increase their take, and impose the default APR for minor transgressions. Below is the disclosure statement for a surveyed MasterCard. To date, the highest APR for any credit card is 35%.

Note that if your payment is received late twice in six consecutive months, you will be bumped up to the default APR, whose maximum is 35%. If you "default in the performance of any of your obligations in connection with any other account" or "fail to honor any other obligation" you have with the bank, you will pay the default APR. What could that mean? Pretty much anything the bank wants it to. And one more thing: You will stay in the penalty zone default APR for as long as the bank chooses to keep you there.

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3. Fixing what ain't broke - Fixed vs. variable APRs

When you see the term "fixed APR" on a credit card offer, you might assume that, like a traditional home mortgage, the interest rate will remain unchanged for the life of the loan. But that is not true. A fixed APR on a credit card simply means that the creditor is legally obliged to notify you if it changes the APR (unless, of course, you are being penalized for violating the terms of the credit agreement - like paying late once). If the creditor changes the APR for reasons of its own, federal law says you must be given 15 days notice.

Variable APRs are interest rates that rise and fall according to the changes in a national index, usually the Wall Street Journal's survey of prime lending rates among U.S. banks.

Below are the terms for the credit cards available from a surveyed credit card. Two cards have fixed APRs and one has a variable rate. Note that the Platinum Visa's variable APR is reviewed and changed quarterly according to the Wall Street Journal prime rate.

Whether your credit card has a fixed or variable rate, the credit card provider can change the rate at its discretion. The terms for a bank Visa card states the facts clearly: "We reserve the right to unilaterally change the rates, fees, costs, and other terms at any time for any reason..."

Therefore, be warned. Just because you have shopped around for a low APR, and have received a credit card with that APR, doesn't mean you will still have the same low interest rate three months from now, or even one month from now.

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4. Truth or consequences - Will the real APR please stand up?

Below is the disclosure for another surveyed MasterCard. It is an excellent example of the credit industry shell game.

The APR box at the top presents a menu of eight possible rates that your card might have, depending on the lender's "review of your application and credit history." Under that is the balance transfer APR, the cash advance APR, and the delinquency APR.

On the next level down in the maze is the disclosure that APR rates are adjusted monthly. Not yearly, not every six months, not every quarter - every month.

Below that you find that there is an $85 annual fee if you apply for the prime rate + 0% APR; however, cards with the higher APRs do not have an annual fee.

Last but not least, you are informed that if your application for a Platinum Prime card is rejected, the lender may substitute another MasterCard with different rates and fees.

The general trend in credit card offers is to show multiple rates in such a way as to confuse the applicant and make comparison shopping among credit cards difficult.

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5. The Late Fee - Going from carriage to pumpkin at midnight (or 5 p.m.)

As if doubling your APR was not enough punishment for a late payment on your credit card balance, banks have also sharply increased late fees and other penalty fees. Currently the highest fixed late payment fee for credit cards is $39. Below is a screenshot that shows the late fee and over-the-limit fee for the surveyed credit card. Note that the bank has the option of increasing your APR to the default if you are late (once) or over the limit (once).

Another interesting development is the imposing of a late fee based on a percentage of your balance. Below is the late fee disclosure of a common Platinum card. If you were carrying a balance of $5,000, your late fee would be $149.50.

What you won't find in the disclosure statements is this: Just because your payment is delivered by the due date does not mean it will be credited to your account on that date. The creditor will post the payment when it gets around to it, and some consumers have complained (on Internet blogs) that their payments were sent and received early, but the card issuer delayed posting for purposes of charging late fees.

Moral to the story: if you can send your payment even before you receive the credit card bill, do so. Better yet, post the payment online so that you have the payment date documented with a confirmation number.

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6. Cash will cost you more - Cash advance fees and APRs

Need cash? No problem. You can obtain a cash advance on your credit card. Just remember that you will pay at the front and out the back. Frequently cash advance fees are 3 to 4% of the transaction amount. After searching the Internet, it seems that 5% is the highest fee currently charged for a credit card cash withdrawal. Take a look at the screenshot below of a surveyed bank's MasterCard 5% cash advance fee.

One more thing: Because the creditor wants to profit as much as possible from the loan, it will always apply your payments to the lower APR balances first (i.e., purchases and balance transfers will be paid off before cash advances), as noted in the illustration above.

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7. Pay to play -- Membership is expensive

High income and low income credit card holders are equal in one way: When it comes to joining the club, it costs you more. The annual fees for premium and subprime credit cards are high. Also, credit cards for people with bad credit ratings have additional setup fees.

The most expensive credit card annual fee belongs to a bank's membership card, whose members belong to a (not so) secret, by-invitation-only group of high rollers who charge on the Black upwards of six figures a year. The annual fee is $2,500.

The screenshot below is an example of annual fees for those residing at the other end of the income scale. This bank's Visa card is for people with "damaged" credit ratings. Fees to open the credit card total $152, and the annual fees are $144.

For those in between the two extremes, there are cards that offer some kind of reward for frequent usage, such as airline miles or discounts at restaurants, hotels, or stores. These cards frequently have annual fees in the $50 to $150 range. Whether the annual reward is worth the annual fee should be something that you consider carefully.

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8. Playing with your emotions - Charity affinity cards

We want to do something good for the world - cure cancer, save helpless animals from suffering and extinction, build houses for the needy... Enter the charity affinity card. Credit card providers make an agreement with a charity to use the charity's name on the card, in exchange for a donation to the charity. The question is how much is being donated to the charity? For some reason, many providers do not disclose the amount. Also, how soon the foundation gets its money is often not mentioned.

Are charity cards a trap? That's up to you to decide. They are a feel-good marketing technique used by creditors to lure more customers into their net. As long as you know that, and keep in mind that the charity will receive a very small amount of money from you, then charity cards are not a trap. You might consider this: If you can afford to make $12,000 of purchases in a year, you might be able to afford sending your favorite charity an $80 check directly, and cut out the fat and prosperous middle man (the credit card provider).

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9. The one-two punch - Two-cycle balance computation

Most credit card providers calculate their finance charges according to the average of your daily balance during one month (adding new purchases and subtracting payments). But a number of card providers are using a two-cycle balance computation. This calculation method determines the interest fee from an average of two months. Your finance charges will be much higher than charges based on the average daily balance calculation if you do not pay off your credit card in full every month.

The screenshots below show the two-cycle balance method of finance charge calculation.

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10. Pay not to play - Inactivity fees

Some credit card providers will charge you if you do not use your card. Below are the fees associated with a surveyed Visa card, including a non-usage fee.

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11. Other people's money - Foreign transaction fees

If you purchase something outside the United States, or get a foreign currency cash withdrawal from your credit card, the credit card provider charges a transaction fee. This fee is over and above the 1% currency exchange fee that Visa and MasterCard charge you. Banks have invented this fee and added it to the long list of extra charges simply because they can. There is no additional processing work done by the bank. The foreign transaction fee ranges from 1 to 3%, with a few exceptions. Capital One does not apply foreign transaction fees.

Below is the surveyed bank's disclosure for one of its Visa cards, which states the foreign transaction fee is 3% of the purchase amount.

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12. Forever is a very long time - Paying the minimum

The last trap of the dirty dozen is not obvious and you probably won't see it on a credit card disclosure statement. Very small payments on a loan mean you will spend a very long time paying back the loan. More than that, you will ultimately pay several times the amount you spent on purchases or cash advances because of the accumulated interest charges.

Most credit cards require a minimum payment of 2% of the balance, assuming you are not condemned to the default APR corner. The illustration below shows the minimum payment for a surveyed MasterCard .

If the consumer makes the suggested extremely low minimum payment, it guarantees the creditor increased profits for a long period of time - years, maybe decades. It is to the credit card provider's advantage to keep you indebted for as long as possible. Creditor wins; you lose.

Is there a happy ending?

First, here is a summary of the dirty dozen credit card traps:

• The 0% APR is a marketing technique to gain new customers. It is temporary and often part of a bait and switch scheme in which you apply for the 0% APR credit card and are given a card with a much higher interest rate. Even if you do receive the 0% APR, the lender's strict terms and conditions increase the likelihood of you losing the rate before the introductory term expires.
• The default APR is the lender's highest interest rate. An increasing number of good credit customers are being charged this penalty rate, at the whim of the creditor.
• A fixed APR is a meaningless term. Credit card providers can change the interest they charge to lend you money at any time, for any reason. The fixed APR simply gives the consumer the right to be notified if the lender changes the interest rate for reasons other than those specified in the contract terms (i.e., any reason at all). A variable APR can also be changed at any time by the provider, but in addition it varies according to a national index, such as the Wall Street Journal's survey of prime interest rates among U.S. banks.
• Listing several APRs on credit card offers is a technique to confuse customers and prevent them from comparison shopping. It also makes it easier for a credit card provider to defend itself against lawsuits, since its advertising does not make a specific promise or claim to provide a certain interest rate.
• Late fees are much higher than they used to be (currently around $40 or a percentage of the loan balance), and are imposed much sooner than in the past (payment must be received before close of business on the due date). Late fees are just one of a raft of financial penalties that credit card providers are using to increase their profits
• Borrowing cash via your credit card is much more expensive than making a purchase, in terms of a higher interest rate and a cash advance fee. The cash advance loan remains on your unpaid credit card balance the longest in order to maximize the creditor's interest rate profits.
• Credit cards that have added value for the holder have annual fees, some of which are quite expensive. For the wealthy consumer, added value can mean exclusive concierge and personal shopper services; for the consumer with damaged credit it can mean obtaining and rebuilding access to credit. For those in between, added value can mean accumulated rewards such as free airline tickets. In all cases, the consumer should evaluate the annual cost of the card in relation to its value-added reward.
• Charity affinity cards are frequently a deceptive marketing technique, designed to appeal to the consumer's heart in hopes she will forget to use her head. Suspiciously, many charity credit cards do not disclose the amount that is donated to the charity, and when they do, the percentage is infinitesimal.
• Two-cycle balance computation is a method of computing finance charges that is more costlyd to the consumer than the average daily balance method. Because there is no specific number (as with an APR or a fee) listed in the credit card offer disclosures, it is easy to overlook this trap, which could be an expensive mistake for those who do not pay their credit card balances in full every month.
• Some credit card providers charge non-usage or inactivity fees. Although this is not an issue for most credit card holders, since we use our credit cards daily, it is important to be aware of in certain cases. For example, you may be trying to improve your credit score by paying off a credit card and not using it.
• Foreign transaction fees are another invention of credit card providers to diversify and increase their profit-making activities. Purchases and cash advances from foreign countries are charged a fee that is frequently 3% of the purchase price.
• Setting the minimum monthly credit card payment at a very low percentage of the loan balance is a practice that seems to be friendly to the consumer. It is not. Making low payments increases the cost of the loan and lengthens the time needed to pay off that loan.

Whether the ending is happy or unhappy is up to you. Because the credit industry is not currently under strict regulation by state and federal laws, it is free to engage in usurious and perhaps unfair business practices. Comparison shopping for the best credit card is less meaningful now, because the majority of credit card providers are using the above-listed traps. The most important criteria to use when looking for a new credit card is to be aware of the pitfalls. Then you can use your knowledge to plan your finances wisely.

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